By Edwin W. Harris, Jr
Mr Mohammed Bello-Koko, Managing Director, Nigerian Ports Authority and Chairman of this occasion. Prof. Umar Garba Danbatta, Exec, Vice Chairman, Nigerian Communications Commission and Special Guest of Honour Mr. Ahmed Kuru, Managing Director, Assets Management Corporation of Nigeria and Keynoter Distinguished DiscussantsLadies and Gentlemen, I am deeply honoured to be invited to deliver the 11th Anniversary Lecture of the Realnews Magazine and Publications Ltd. I am particularly thankful to Maureen Chigbo, the Publisher of the Realnews Magazine and his entire team for organizing this Annual Lecture, with the theme: “The Threats of Illicit Funds Flow to the African Economy”.
I would like to acknowledge the key role that Realnews Magazine and other media houses are playing, especially in exposing illicit financial flows (IFFs) and underlying criminal activities and commend their work and contributions to the development of Nigeria, and indeed, the region and Africa in general.
2. Distinguished ladies and Gentlemen, Illicit Financial Flows (IFF) are a global phenomenon. They do not respect borders. They undermine global social, political and economic security and have become a serious threat to the attainment of development agenda, particularly in Africa.
Consequently, these issues have moved into the forefront of Africa’s agenda in recent years and will continue to shape thinking about development in the coming years. I am pleased that Realnews Magazines has chosen to focus on this matter from an African perspective during this anniversary. This is apt and timely, because our continent is one where IFFs pose a significant threat to the developmental agendas of our countries. I strongly believe that this event will boost the sense of urgency that we have about the threats of IFFs and raise our collective response against such flows.
3. Although there is no general agreement of a precise definition of the term IFF, the 2015 UN High-Level Panel Report on Illicit Financial Flows from Africa defines IFFs as money illegally earned, transferred or used. In other words, these flows of money are in violation of laws in their origin, or during their movement or use, and are therefore considered illicit. In the context of this definition therefore, the High-Level Panel Report on Illicit Financial Flows from Africa notes that IFFs from Africa typically originate from three sources: (i) corruption, including money acquired through bribery and abuse of office by public sector and private sector officials; (ii) criminal Activities, ranging from trafficking in people and drugs, arms smuggling, fraud in the financial sector, such as unauthorized or unsecured loans, money laundering, stock market manipulation and outright forgery; and (iii) commercial Activities, arising from business-related activities, and having several purposes, including hiding wealth, evading or aggressively avoiding tax, and dodging customs duties and domestic levies
4. Globally, IFFs are driven by a number of ‘push’ and ‘pull’ factors. The most obvious push factor driving IFFs is the desire to hide illicit wealth. Similarly, poor governance and structural deficiencies in the financial systems remain concerning and largely contribute to driving the outflow of illicit flows. Other push factors include weak regulatory structures, tax incentives, weak institutional capacities, and Double Taxation Agreements (DTAs). A major pull factor for IFFs from Africa is the existence of financial secrecy jurisdictions and/or tax havens (Mbeki Report).
The scale of IFFs
5. Ladies and Gentlemen, IFFs are inherently difficult to measure due to several factors, including the illegality and opacity associated with some of these flows, their underlying activities, limited data, the absence of a uniform and consensual definition of IFFs and the lack of a universally accepted methodology to estimate or monitor IFFs. Consequently, the scale of IFFs out of African countries remains a matter of controversy with estimates varying greatly and are heavily debated. For instance, the United Nations Economic Commission for Africa (UNECA) High Level Panel (HLP) on IFFs stated that Africa is estimated to have lost $1 trillion or more over the past 50 years to IFFs and is estimated to be losing more than $50 billion annually in IFFs. This is corroborated by the Organisation for Economic Co-operation and Development (OECD) which estimated that Africa loses as much as $60 billion each year in IFFs . Similarly, in 2020, the UN Conference on Trade and Development (UNCTAD), in its report on Economic Development in Africa, estimated that Africa loses about US$88.6 billion, 3.7 per cent of its gross domestic product (GDP), annually in illicit financial flows. At a regional level, the scale of criminal proceeds in the west Africa has been estimated at 3.6% of global gross domestic product (GDP).
6. Despite the challenges in estimating the scale of IFFs in Africa and the critiques of the current estimates on IFFs, there is widespread agreement among critical stakeholders that their scale is huge, and growing and are almost equal to Official Development Assistance (ODA) and Foreign Direct Investments (FDI) flows to Africa combined.
The threats of IFFs to African Economy
7. Distinguished Guests, Ladies and Gentlemen, IFFs are a threat to sustainable development and one of the greatest contemporary challenges facing the international community and in particular, Africa. Literature shows that IFFs have severe economic, social and political consequences on Africa. The UN Office on Drugs and Crime (UNODC), in its Strategic Vision for Africa 2030 launched in February 2021, notes that IFFs remain a key impediment to Africa’s attainment of the 2030 Agenda and the African Union Agenda 2063. IFFs threaten fundamental aspects of development, including weakening the rule of law, undermining the quality and accountability of democratic institutions and, some argue, affect broader social trust and encourage further criminal activity.
. Although the direct economic impacts of IFFs on Africa cannot be precisely quantified, IFFs constitute a major threat to Africa with significant devastating consequences as a vast volume of wealth is lost each year that could be used to fund sustainable economic development and provide public services. In particular, IFFs undermine domestic revenue collection and have adverse consequences on the ability of African countries to optimally benefit from the extractive sectors. Thus, IFFs exacerbate the challenges African governments face in mobilizing domestic resources to address the needs of citizens, to promote development, and to achieve the Sustainable Development Goals. Also, IFFs deprive the African countries of appreciable amounts of investment funds, which could otherwise spur economic growth. In addition to foregone investment, IFFs are presently curtailing Africa’s savings rate. Furthermore, IFFs are also inhibiting African economic development by stifling trade and macroeconomic stability.
9. On the social front, the negative social impact of IFFs on Africa manifest in several ways, including poverty and inequalities. As noted earlier, IFFs deplete government revenue. This contributes to the widening of the funding deficits for infrastructure and social policy measures for poverty reduction, making it difficult to develop infrastructure and fund social policy measures for poverty alleviation and thus deepening inequality, weaking social cohesion, and worsening poverty and other social development outcomes such as health, power supply, education and other deprivations. As evident in the Africa’s human development record, the United Nations (UN) Human Development Index Reports have consistently shown poor scores for most African countries. For example, the UN Human Development Index report 2022 indicates that about 83% of Africa countries recorded between medium and very low human development and this is partly due to IFFs.
10. Besides the considerable amounts drained annually, IFFs also threatens peace and security in Africa. IFFs have direct implications on Africa’s security because of their links with corruption, organized crime, illegal exploitation of natural resources, fraud in international trade, drugs counterfeiting and tax evasion which are as harmful as the diversion of money from public priorities. Some researchers have argued that IFFs contribute to the devastation of peace and security by promoting conflict and providing terrorist and criminal groups the financial means to conduct their operations and undermine peace in Africa.
Response to Illicit Financial Flows
11. The threats posed by IFFs to development and security have placed IFFs on global discourse and led to increased effort from the international community toward combatting IFFs. Broadly, these efforts and initiatives are aim at strengthening the integrity of the global financial system, a higher level of transparency, and addressing international corruption as well as the cross-border movement of illicit funds and recovering stolen assets. For example, the adoption of the UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, the International Convention for the Suppression of the Financing of Terrorism, the Convention Against Transnational Organized Crime, and the Convention Against Corruption were all aimed at seeking to stem IFFs. In addition, the UN Sustainable Development Goal target 16.4, calls for combatting IFFs as a critical priority. Similarly, the United Nations Secretary-General’s Road Map for Financing the 2030 Agenda for Sustainable Development 2019-2021 includes the strengthening of international and regional cooperation, and country capacity to prevent, reduce and recover IFFs as one of three priority areas. Similarly, the High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda (FACTI Panel) jointly launched by the President of the United Nations General Assembly and the President of the United Nations Economic and Social Council in March 2020 is expected to contribute to the overall efforts undertaken by member States to combat IFFs and to explore further coordinated actions.
12. Other notable global initiative for combatting IFFs is the Financial Action Task Force (created 1989). The FATF standards set out a broad and consistent framework of measures which countries should implement in order to combat money laundering and the financing of terrorism and proliferation to more comprehensively address the sources and intended uses of IFF. The FATF and its Style Regional Bodies, including GIABA often evaluate the extent to which their member States have implemented the international AML/CFT standards.
13. At the continental level, the African Union (AU) has placed fighting IFFs at the top of its agenda, recognising this as critical for the achievement of “Agenda 2063 ’’. In particular, AU under Aspiration 7 of its 2063 Agenda calls on the continent “to take full responsibility for financing its development” and in order to achieve this goal, it must “eliminate illicit capital outflows and promote the involvement of civil society organizations to track and bring back any illicit capital outflows.” Similarly, the establishment of the High-Level Panel (HLP) on IFFs in 2012 led by H.E. Thabo Mbeki, former President of South Africa marked a critical step which demonstrated the concern shared by African governments and represents the continent’s commitment to combat IFFs. The AU is also collaborating with partners to mobilize needed resources, including the launched of a €7 million (US$8.4 million) Multi Donor Action with the European Union and the German Federal Ministry of Economic Development and Cooperation the AU in December 2020, to combat the scourge of IFFs on the African continent. The AU and its member States are also in strategic partnerships to address existing and emerging challenges and gaps in the fight against IFFs, including through the instrumentality of the African Tax Administration Forum (ATAF).
At the national level, several efforts have been made across the continent to address IFFs. These include the ratification /domestication of relevant UN conventions, enactment of AML/CFT and related legal and regulatory frameworks, establishment of critical institutions such as financial intelligence units and anti-corruption units, conduct of national risk assessment to better understand risks, creation of domestic coordination mechanisms such as AML/CFT Inter Ministerial Committees, and enhancement of international cooperation and information exchange through formal and informal cooperation channels.
Why are African countries unable to effectively address IFFs?
15. Distinguished Guests, Ladies and Gentlemen, despite the plethora of initiatives and efforts at global, regional and national levels, it is worrisome that IFFs remain a major threat to the African economy. From the mutual evaluations so far completed, we found that several factors account for the inability of African countries to effectively stem IFFs. These include limited understanding of IFFs and related risks; inadequacies of legal and regulatory frameworks; limited resources (human, financial and technical) and challenges of independence and autonomy of critical institutions; weak domestic coordination and international cooperation; weak regulatory/supervisory regime; poor governance, lack of a comprehensive sanctions regime and non-application of sanctions (or sanctions applied are not effective, dissuasive, and proportionate), as well as, the sheer complexity in tracking the money, and the lack of capacity to monitor the large multinational firms operating in the extractive sector in many African countries.
the lack of political will also contribute to inhibiting the effective prevention of IFFs in Africa. In many cases, corrupt officials tend to protect their own interests by remaining passive to the mechanisms that are essential to combat IFFs and to promote asset recovery. In cases where the necessary initiatives have been adapted, there is often a lack of implementation of laws and policies owing to the lack of will.
17. IFFs in Africa are also sustained by the existence of a vulnerable financial system that allows huge financial outflows. The features that make Africa’s financial system vulnerable to IFFs include a cash-based informal financial system; weak banking, regulatory and supervisory frameworks; and low levels of compliance in AML/CFT preventive measures.
GIABA’s Work in addressing IFF
18. GIABA’s response to the challenge of IFFs in the region is within the context of its core mandates as an FATF style regional body and a specialized institution of ECOWAS. Some of the specific examples of our work with direct impact on IFFs include:
a) Capacity enhancement – We are working with member States to help them build capacity in critical areas for reducing money laundering, terrorist financing as well as IFFs. This support is targeted at relevant competent authorities such as financial intelligence units; supervisory, law enforcement and prosecutorial authorities and the private sector. Other related programmes include Inter-University debates, open house targeted at youth and the journalist programme. Similarly, GIABA deployed AML/CFT analytical softwares to 13 ECOWAS member States and also provided critical infrastructures such as computers and analytical tools to strengthen the operational efficiencies of key institutions.
b) Promotion of risk understanding – We are supporting member States with technical and financial assistance to identify and respond to ML/TF risks through the of conduct National risk assessment (NRA). Broadly, the NRA focuses on most of the offenses that generate illegal proceeds, including corruption, tax evasion, organized crime, and environmental crime and helps member States to understand the extent of their exposure to many of the activities that give rise to IFFs. Similarly, GIABA has published several typologies and research reports, including the report on Illicit Financial Flows – The Economy of Illicit Trade in West Africa which provide better understanding of methods, trends and risk of IFFs.
c) Strengthening of domestic and regional cooperation – GIABA specific initiatives in this regard include the establishment of AML/CFT Inter-Ministerial Committee / National Coordination Committee, GIABA public-Private sector consultative Forum, Compliance Officers Forum of GIABA member States, and the Forum of Financial Intelligence of GIABA member States. These were all aimed at strengthening domestic coordination and regional cooperation in AML/CFT efforts and to improve public-private partnership in AML/CFT implementation.
d) Support for legal and regulatory reforms – We support, on need basis, the review of AML/CFT legal and regulatory framework of member States to ensure their consistency with international requirements so they could adequately address ML/TF as well as IFFs.
e) Mutual evaluation / assessment and compliance monitoring – In line with our mandate as an FSRB, we assess compliance of member States with AML/CFT international standards. Under the current round of evaluation, 16 member States have been assessed, with 14 evaluation reports published and two at various stages of completion while the assessment for the last country (STP) will be conducted in January 2024. The assessments highlight areas of progress, strategic deficiencies in the AML/CFT regime and priority/recommended actions that countries need to implement to further strengthen their regime. Overall, while significant progress has been made in terms of technical compliance across member States, fundamental to major improvements are required in terms of effectiveness (see table below), to address ML/TF and reduce IFFs.
Source – Compiled from various MERs by Giwa Sechap, 2023
Our compliance monitoring through the follow up regime also facilitates compliance with global AML/CFT standards. For instance, through our follow up process, some of our member States have improved their legal and regulatory framework. The improvement in technical compliance (see table below) impacts positively on efforts to curb IFFs in the region.
Source – Compiled from various Follow up reports by Giwa Sechap, 2023
19. Ladies and Gentlemen, while much is being done by GIABA, there is much more to do. Overall, the onus is on member States to leverage on the support provided by GIABA and undertake necessary reforms to enhance their effectiveness in addressing money laundering, terrorist financing and IFFs. But the question is what should GIABA member States and indeed, other African countries do differently or reinforce to effectively address IFF.
What African countries should do to stem IFFs
20. In answering this question, it is imperative to mention that the solutions to addressing IFFs will differ depending on the country context and the underlying activities that result in these outflows. In some cases, actions will involve preventing criminal activity. In other cases, it may involve identifying and sanctioning serious and substantial illegal tax evasion and in other cases, other measures may be required. Notwithstanding, based on findings of our mutual evaluations, the following general recommendations are proffered:
a) Enhancing IFF risk understanding – The critical first step in responding to IFFs is to assess and understand the risks. Most of the NRAs or sectoral assessments conducted across African countries are not comprehensive with many of them not covering all the offenses that generate illegal proceeds, including corruption, tax evasion, organized crime, and environmental crime which limits countries abilities to comprehensively understand the extent of their exposure to many of the activities that give rise to IFFs and craft appropriate strategy to respond to the risks. Thus, a review of existing NRAs to identify specific areas or sectors most prone to IFFs is absolutely necessary to deepen understanding of IFF risks and generate appropriate response. Conducting robust NRA would require to a large extent, the maintenance of comprehensive AML/CFT & IFF related statistics.
b) Enhancing domestic coordination and collaboration – Many agencies have roles to play in addressing IFFs. For example, FIUs, Customs and tax authorities, supervisory and law enforcement agencies and the judiciary. Therefore, tackling IFFs requires strong and effective inter-agency collaboration and coordination amongst these authorities at both operational and policy levels.
c) Reform of legal and regulatory frameworks – While some progress have been made in this regard, however, given emerging trends in IFFs, recent changes to FATF standards on beneficial ownership (R24 & 25) etc, African countries still need to undertake further reforms to align or ensure consistency of such frameworks with international standards. Comprehensive frameworks for tackling IFFs, including robust IFF policy, up-to-date laws and regulations is absolutely vital in order to provide a comprehensive legal basis for curbing IFFs.
d) Strengthening public-private partnerships (PPP) – Effective PPPs constitute a key and critical aspect in the fight against IFFs. Specific areas of cooperation in PPPs could include IFFs risk assessments; national policy and strategy formulation; investigations and prosecution; freezing and confiscation of assets; drafting of legislation and regulations; IFFs trends and typologies; feedback mechanisms; training and reporting of suspicious transactions (STRs) relating to IFFs. Overall, this can facilitate a shared understanding of IFFs risks; fostering access to information; enhancing the level of expertise and knowledge for all stakeholders; enhancing implementation of AML/CFT preventive measures, and improving law enforcement outcomes, especially IFFs investigation, prosecution, confiscation of criminal proceeds or disruption of criminal networks; and more timely and relevant reporting in response to active IFF investigations.
e) Working with civil society/Media – Often the vital role that civil society/media can play is neglected, yet their activities have had a significant impact on uncovering the size and scope of IFFs. Curbing IFFs is an agenda where we need the the government and civil society/media to come together. So our countries need to strengthen engagement and partnership with the civil society/media in the shared responsibility to address IFF. For example, journalists can help government agencies in their investigations of illegal activities by providing much needed data.
f) Strengthen international cooperation – The outcomes of published mutual evaluation reports of African countries (as at September 27) on international cooperation (Immediate Outcome 2) indicate that none of the countries in Africa achieved a high level of effectiveness while only Ghana and Egypt achieved a Substantial Level of Effectiveness with all other assessed countries achieving either a moderate or low level of effectiveness. This means that major to fundamental improvements are required in the international cooperation regime of over 94% of assessed African countries. Thus, African countries need to strengthen formal and informal cooperation mechanism and proactively seek international cooperation on IFF matters.
21. Overall, in the words of the Under-Secretary-General and Special Adviser to the UN Secretary-General on Africa, Cristina Duarte “addressing IFFs requires tackling the imbalance in the international financial and trade systems, while curbing such flows at national and regional levels requires confronting weak institutions that have prevented Africa from exercising the necessary ownership over economic and financial flows, such as managing natural resources, particularly in the extractive industry”.
22. Distinguished guest, Ladies and Gentlemen, IFFs are a systemic problem requiring a systemic solution. African countries can’t afford to relax as IFFs threaten sustainable development. Africa’s efforts to ensure the reduction of IFFs must be pro-active, firm and unwavering while activities that give rise to IFFs must be vigorously fought without compromise. We must act quickly and act now. The key task is to take bold steps, cooperate and coordinate efforts, and unit to dismantle the system extracting wealth from Africa. This requires collective actions by all critical stakeholders, including national authorities, the private sector and civil society organisations to press for change in their countries and the continent at large.
23. All of us here today have a duty to advance this course, it may be challenging, but it is possible. Play your part for it can be done.
24. I look forward to a fruitful and productive discussion in the next session.
25. Thank you.
Threats of illicit funds flow to the african countries, Being full paper presented by Mr Edwin W. Harris Jr., Director General, Inter-Governmental Action Group Against Money Laundering in West africa at Realnews 11th Anniversary Lecture in Lagos on Tuesday Nov. 07, 2023.